Page 1

Risk Law Firm

Congress Regulates Selection of Brokers by Justice

Complaints of Unfairness Led to Legislative Mandate

(2002-4) — Congress has imposed guidelines on the U.S. Department of Justice (DOJ) in the selection of structured settlement brokers to handle cases brought under the Federal Tort Claims Act. The 21st Century Department of Justice Appropriations Authorization Act was passed by Congress on October 23, 2002, and sent to President Bush, which he signed on November 5. The conference report summary for the bill, H.R. 2215, described section 11015, “Use of Annuity Brokers in Structured Settlements,” as follows:

“This section reforms the Department of Justice’s practice for using annuity brokers in structured settlements in two ways. First, it directs the Attorney General to establish a list of annuity brokers who meet minimum qualifications for providing annuity brokerage services in connection with structured settlements entered by the United States. Second, this provision permits the United States Attorney (or his designee) involved in any settlement negotiations (except those negotiated exclusively through the Civil Division of the Department of Justice) to have the exclusive authority to select an annuity broker from the list of such brokers established by the Attorney General, provided that all documents related to any settlement comply with Department of Justice requirements.”

DOJ oversees the resolution of all claims against the United States, including those delegated to other agencies. An assistant attorney general has settlement authority up to $2 million. A United States attorney, who serves a geographical region defined by the jurisdiction of a U.S. District Court and is appointed by the president, is delegated settlement authority up to $1 million. A branch director’s authority is up to $500,000. Agencies including Veterans Affairs, the Army, Navy, Air Force and Postal Service can settle claims for up to $200,000; Department of Transportation, $100,000; and other agencies, up to $25,000. Settlement authority for $2 million and above is reserved to the associate attorney general level, who is a presidential appointee confirmed by the Senate.

Reforms Imposed in Response to Complaints Since Early ‘90s

These reforms were imposed in response to several complaints from structured settlement brokers since the early 1990s to members of Congress that the Torts Branch unfairly excluded from consideration anyone who works primarily with claimants, and in light of evidence collected through congressional inquiries that DOJ employees favor a small number of cronies by choosing them to handle the purchase by the government of annuities, often in very large dollar amounts, for which the broker receives a commission. DOJ has long resisted the creation of broker lists, stating officially that “every broker should be given an opportunity to promote his, her, or its services” and that “no lists of ‘approved,’ ‘preferred,’ or ‘disapproved’ brokers are to be maintained.” In practice, the absence of a list has encouraged DOJ to select its brokers at will, as though unbridled by any system.

The official DOJ policy memorandum signed June 30, 1997, by John C. Dwyer, acting associate attorney general, is what they provide to members of Congress in response to inquiries. “Our policy is to afford an opportunity to qualified brokers to provide services. While brokers who have performed well in the past obviously will be appropriately considered for repeated use, such use cannot [emphasis in original] be to the exclusion of new brokers.” The memo continues: “Finally, it is important that each office maintains the appearance as well as the reality of fairness in its use of brokers. Therefore, any activity tending toward an appearance of favoritism, any action contrary to any rules in this memorandum, or any activity incongruent with the spirit of this memorandum must be scrupulously avoided.”

Justice Department Violated Its Own Policy Barring Exclusion

However, in a back-channel communication dated June 28, 2000, to assistant U.S. attorneys and counsel of agencies having settlement authority, Jeffrey Axelrad, director of the Torts Branch at DOJ, said: “We advise against using any broker who is brought to a particular settlement by the injured party’s attorney. However, the fact that you will not use a broker in a particular settlement because the broker was brought to the settlement by the injured party’s attorney does not preclude you from using that broker in another settlement where the broker has not been contacted by the injured party’s attorney. We suggest, however, that brokers who work primarily or exclusively on behalf of persons funding the settlement (e.g., defendants) be utilized.” When Axelrad addressed the Association of Trial Lawyers in America at its 2002 annual meeting in August in Atlanta, he was asked by an audience member how DOJ justified its broker selection procedure in view of the procurement statutes, which require advertising and bidding, and the Administrative Procedure Act. Axelrad responded “we [the government] don’t pay them [the brokers] anything so that doesn’t apply.” In fact, the defense brokers provide services and typically are paid the entire case settlement amount that they, in turn, distribute, including the cash portion paid to the claimants and their attorneys and the annuity premiums paid to the annuity issuers. The annuity issuers then pay the brokers based on the annuity’s cost.

DOJ has clamped down even tighter on plaintiff broker participation by threatening those on the crony short list who attempt to work with plaintiff brokers and split commissions with loss of favored status. Roger Einerson, deputy to Axelrad, exchanged three pages of e-mails between June 14-26, 2002, with brokers “hired” by the government to assist in structured settlements in Federal Tort Claims Act cases. A request under the Freedom of Information Act for these e-mails was denied. The government asserts: “These e-mail exchanges are intra-agency communications which fall within the purview of 5 U.S.C. § 552(b)(5) and are being withheld based upon the attorney work product privilege incorporated within this exemption.” Work product privilege pertains to documents prepared in anticipation of case-specific litigation, not communications of a general nature with potential vendors.

Government regulations for the procurement of supplies or services are designed to prevent cronyism and nepotism in the awarding of government business, giving all persons an equal right to compete for government contracts, and to secure for the government the benefits of competition. See U.S. v. Brookridge Farm, C.C.A.Colo. 1940, 111 F.2d 461. Government policy pertaining to advertisements is codified at 41 U.S.C. § 5. “Advertisements for proposals for purchases and contracts for supplies or services for Government departments; application to Government Sales and contracts to sell and to Government corporations.”

Legislation May Be Ineffective and Even Counterproductive

Not everyone believes that section 11015 is the ultimate solution. “Recent legislation may be ineffective and even counterproductive,” says Frederick W. Claybrook, Jr., a partner with the Washington, D.C.-based law firm Crowell & Moring, who has had much experience in litigation involving government contracts. According to Claybrook, some of this legislation’s many problems include:

  • It allows the Torts Branch to establish a list of acceptable brokers;
  • It does not define “minimum qualifications” for brokers, permitting the Torts Branch to automatically disqualify plaintiffs’ brokers;
  • It does not require (or prohibit) a formal rulemaking process to establish the “minimum qualifications” for brokers;
  • It does not establish any administrative review process for a broker improperly kept off the “Approved List;”
  • The “Approved List” applies only, in any event, to settlements not handled by the Torts Branch, and the Torts Branch handles all large cases.

In addition, President Bush, in his approval message, indicates that he believes the legislation’s instruction to give U.S. attorneys “exclusive authority” to select a broker from the list may impinge on his constitutional prerogative to run the executive branch as he sees fit.

Claybrook also says that the new legislation could be argued by DOJ to suggest that, at least when brokers are selected from the list, the selection is not subject to the procurement laws. However, U.S. House of Representatives committee sources confirmed that the new legislation was not intended to give DOJ any additional authority in selecting brokers than it already had. The sources stated that nothing in this bill should be interpreted to allow DOJ to circumvent established procurement law.

Injury Victims Are Denied Right to Handle Own Financial Affairs

Critics say the real travesty in DOJ’s current practice of excluding plaintiff brokers is that the injury victims, who have specific rights under the Federal Torts Claims Act and the Internal Revenue Code, are denied the right to handle their own financial affairs after the government concedes to pay a compromise settlement amount.

The legislation does not address DOJ’s imposition of ultra vires policy—meaning that the policy is unauthorized or beyond the scope of power allowed by law. For example, DOJ’s practice of discounting settlement offers if they are to include tax-free periodic payments is in direct conflict with the stated public policy. The congressional Joint Committee on Taxation called the tax exclusion a “subsidy” to encourage the claimant to accept a structure, saying:

“The amount of damages in a case involving personal physical injuries or physical sickness may be based on the lifetime medical needs of the recipient. If a recipient chooses a lump sum settlement, there is a chance that the individual may, by design or poor luck, mismanage his or her funds so that future medical expenses are not met. If the recipient exhausts his or her funds, the individual may be in the position to receive medical care under Medicaid or in later years under Medicare. That is, the individual may be able to rely on Federally financed medical care in lieu of the medical care that was intended to have been provided by the personal injury award.” See Joint Committee on Taxation, Tax Treatment of Structured Settlement Arrangements, March 16, 1999, JCX-15-99, III.

In creating DOJ’s own brand of public policy, in apparent conflict with congressional intent, Axelrad wrote in an internal memorandum dated May 10, 2000, to FTCA staff, assistant U.S. attorneys and agency counsel that the “availability of a tax-free lifetime series of annuity payments, for example, should not be conferred on a plaintiff without an offsetting benefit to the government: that is, an adequate quid pro quo. You should be aware of all of the government’s interests and take them into account when you negotiate a settlement on behalf of the United States. Unless the parties specifically negotiate a structured settlement, the settlement is presumed to be for cash only. Government counsel should not agree after the fact to structure a settlement that was based upon a cash only payment or authorization to settle for cash.”

Other instances of unauthorized policy-making are the creation of a reversionary interest in medical payments when a claimant dies. In the private sector, such payments normally are not reversionary and are presumed to compensate the victim’s estate for wrongful death, assuming that person’s life is shortened by injuries connected with the tort claim. Instead, DOJ creates reversionary trusts, which require monitoring by DOJ personnel, and seem to conflict with section 2672 of the Federal Tort Claims Act, which states that “any such award, compromise, settlement, or determination shall be final and conclusive on all offices of the Government, except when procured by means of fraud.” DOJ also denies a physical injury victim’s statutory rights to establish supplemental needs trusts for disability, which preserves that person’s eligibility for Medicaid, considering it double-dipping.

Further Legislation Could Curb Abuses by Justice Department

One proposed solution to both the broker selection and ultra vires policy issues is for Congress to pass legislation to require that all monetary compensation paid under the Federal Tort Claims Act be deposited into a designated or qualified settlement fund under section 468B of the Internal Revenue Code, to be overseen by a court. The text of such legislation should clarify that neither constructive receipt nor economic benefit is triggered, regardless of the number of claimants to be compensated from the fund.

Once the money is paid, DOJ would not be involved in the fund’s administration. The selection of the fund administrator would be subject to approval by the claimant. The broker to handle any structured settlements would be selected by the fund administrator—not the government—and also would be subject to approval by the claimant. All negotiations with DOJ would be in terms of cash. ■

©2006 Richard B. Risk, Jr., J.D. All rights reserved. This publication does not purport to give legal or tax advice and may not be used to avoid penalties that may be imposed under the Internal Revenue Code or to promote, market or recommend to another party any transaction or matter addressed herein. An article that first appeared in Structured Settlements ™ newsletter, published by AMROB Publishing Company, is designated by year and issue number.

Risk Law Firm■ 3417 East 76th Street ■Tulsa, Oklahoma 74136-8064 ■ 918.494.8025 ■